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How underinsurance and overinsurance will affect you?

February 5, 2011

Samir had bought a Honda City last year and added few latest accessories in it. Now it’s time of insurance renewal of the Honda City, so he called up an insurance agent. Insurance agent checked the latest market price of that model and gave him the IDV(Insured declared value), which is around 10% less than the current market value of the same model. Samir told him that the condition of his vehicle is like almost new and value agent is giving him is very less. So he asked him to increase the value.What is IDV (Insured declared value)?IDV means ‘Insured’s Declared Value’. It is the current market value of your vehicle. This means indemnity for total loss/constructive total loss is based on IDV. IDV is arrived at by adjusting the current Manufacturer’s Listed Selling Price of the vehicle with depreciation percentage listed in the table below:

VEHICLE

% OF DEPRECIATION

Not exceeding 6 months

5%

Exceeding 6 months but not exceeding 1 year

15%

Exceeding 1 year but not exceeding 2 years

20%

Exceeding 2 years but not exceeding 3 years

30%

Exceeding 3 years but not exceeding 4 years

40%

Exceeding 4 years but not exceeding 5 years

50%

In case of theft of vehicle or if the vehicle is totally damaged and beyond repairs in an accident, the claim amount payable will be determined on the basis of the IDV. The IDV of the vehicle is to be fixed on the basis of manufacturer’s listed selling price of the brand and model of the vehicle proposed for insurance at the commencement of insurance / renewal and adjusted for depreciation as per schedule.IDV of vehicle which is beyond 5 years of age and of obsolete models of the vehicles (i.e. models which the manufacturers have discontinued to manufacture) is to be determined on the basis of an understanding between insurer and insured.

Let’s check whether Samir did the right thing?Over-insuranceOver insurance is a term used where an insured has bought so much coverage that it exceeds the actual cash value (or the replacement cost) of the risk or property insured. For the insurance company over insurance constitutes a moral hazard because the insured (over insured) may be tempted to make a false claim to profit from a loss.

How over-insurance will affect you?For example, if your car is worth Rs 100,000, you insured it for Rs 120,000 hoping to receive an extra Rs 20,000 when you make a claim. Your insurer will only ever pay out the maximum market value of the car and never more. This means you’ve insuring an extra Rs 20,000 of imagined value. It’s a waste of money.

UnderinsuranceUnder Insurance is a term used when the insured object or an asset, i.e. for example your car is insured for less than its value. The result is that you will only be paid a proportional part of your claim. While this will bring down your premiums, you are only insuring your vehicle for a percentage of its value. This means that you will only ever be paid out that percentage – on every claim.

How underinsurance will affect you?For example, if your car is worth Rs 100,000 and you insured it for Rs 80,000 you are only insuring your car for 80% of its value. If you claim accidental damages to the amount of Rs 5,000 (although covered in the Rs 80,000), you will only be paid out Rs 4,000 or 80% of the Rs 5,000 (Rs 5,000 x Rs 80,000 ÷ Rs 100,000 = Rs 4,000). While the difference may not be a lot of money on a claim Rs 5,000, if the car is stolen, you’ll be responsible for the Rs 20,000 difference if you want to replace the vehicle. It makes sense then to insure for replacement value instead of saving every month.

An important point to remember here is that it is your responsibility to ensure that your car is insured for the correct value. You need to be pro-active here and review your car insurance annually and ask your agent or insurance company to ensure that your car is not insured for more than its market value.

So next time make sure that you are not under or over insured. It is your responsibility, don’t leave it up to your agent/broker or the Insurance Company, because it’s you, who is loosing at the end of the day.

Average ClauseWhen goods are insured for their full value, the insurance company can pay a claim in full. Unfortunately because of inflation (when the prices of goods rises faster than the value of money), the insured value is often less than the replacement value and the principle of averaging is applied. For example, a television set was insured for Rs 20,000. When it was stolen the replacement cost of the new television was Rs 30,000. The television was only insured for two-thirds of the new value so the insurance company will only pay out 2/3 x Rs 30,000 = Rs 20,000 towards replacing the new television set.

ExcessThis is when an amount must be paid as part of the claim. For example, when you dent your car, you must pay the excess of Rs 1,000, then the insurance company will pay the rest of the claim.